Loss on Sale of Rental Property

Sometimes you just need to get out of a bad business situation. That is especially true when you're investing into rental properties. Sometimes taking a loss on a sale of a rental property is the best course of action to take. Although that's bad news at first, there is some good news that is headed your way if this happens. When the next tax season rolls around, it is generally a pretty favorable situation that occurs with your overall return.

Do You Actually Have a Tax Loss?

One of the biggest mistakes that rental property owners make is thinking that they have a tax loss when they do not. This often occurs when a 1031 exchange is made to purchase a rental property. If you've sold a previous property and rolled the proceeds into the new property to avoid capital gains taxes, then the property's basis that you've just sold for a financial loss may not be considered a taxing loss. In a 1031 exchange, the basis in the property is often lower than investors believe it will be.

This is why it is critically important that you know the tax basis of your rental property before you agree to take a loss on the sale of it. You might be taking two hits instead of one! Having a tax gain with an overall financial loss is about the worst situation there is from an investment standpoint.

If You Do Have a Tax Loss, Then You Have Good News

Any tax loss that occurs on the sale of a rental property that you've owned for a year or more qualifies as a Section 1231 loss. Although a loss isn't really “good,” a Section 1231 loss makes the best out of a bad situation. It can be used to reduce any income you may have. Any type qualifies: bonuses, salaries, rental income – if you made money, this kind of loss reduces the amount of profit that you've actually generated.

A Section 1231 loss also can create a situation where you can end up having a net operational loss for the taxing year. If it brings your income below zero, then you can actually carry back your net operational loss for two years and offset your taxable income in those years. If you amend your returns based on your new taxable income levels from the losses, it is possible to recoup some, if not all, of the taxes you paid out in previous years.

If you still have more losses and you've cleared the two previous taxing years AND this year as well, then any additional losses can be carried into the future – up to 20 years. If you don't have any tax payments in the past 2 years, then the entire amount being carried over can go forward into the future as well.

What If I Converted My Residence Into a Rental?

If you know that you could be taking a big loss on a home you've used as a residence, it may pay to change it over to a rental. The house depreciates over its lifetime at a 1/27.5 rate each year, so selling it for a loss may or may not occur. Any loss in value that occurs after converting it to a rental is, however, usually deductible.

It's not always great to take a loss on the sale of a rental property, but tax laws help to ease that pain a little. Every situation is unique, so always be sure to consult with a tax advisor for specific questions about your income situation.
Posted on Nov 11, 2014


The Landlord Tenant Board: What it is and When it is Needed

Many times, there are issues between a landlord and a tenant that need to be resolved but are failed to do so, because both parties have gone too far with their actions, and have retaliated in the... More

How to Create a Residential Lease Agreement

Where there is a landlord, there will also be a tenant, and it is no surprise that these two parties can only work together once there is some sort of agreement, contract or a binding deal in place.... More

The Best Sites for Rental and Lease Agreement Templates

Many landlords find it difficult to write and draft a lease agreement. Since every State has its own general template, it can also be difficult to make sure your lease agreement meets all the criteria... More

The Best Landlord Associations for Landlords to Join

If you’re a landlord and want to manage your business in a better way, you should endeavor to get in touch with those industry experts who have the experience and the skills to help you do it. This is... More

Unpaid Rent

When you talk about the most common disputes arising between landlords and tenants, nonpayment of rent has to be there in the list. People rent their properties to earn money, and when a tenant... More

Section 8 Landlord Pros and Cons

If you have ever rented a living space and have had to move many times, you’d already know how difficult it is to find decent, affordable and secure living premises. A person has to deal with the same... More

Landlord Inspection Checklist: Rights, Letters, and Reports

Landlords across the state have the prime responsibility to make sure they inspect and up keep their property once they have rented it to the tenants. Inspections can occur monthly or yearly depending... More

Landlord Maintenance Costs and Responsibilities

Everyone knows that a landlord’s job is not easy. These folks have specific duties and responsibilities that they must perform in order to be fair. Being a landlord is not a position but it is, in... More

When to Withhold Tenant Security Deposit

Asking for a security deposit is quite common in property dealings. The reason to ask for a security deposit is to have something that would help a property owner recover some of their financial... More

How to Report Bad Tenants

Bad tenants are the worst-case scenario for any landlord; no one wants them, and if someone has them, they want them out in any way possible. There are times when landlords try as much as they can to... More